Plant Your Business Seeds Well

Imagine a dexterous entrepreneur in his/her early startup days, looking for someone to believe in their startup even if they themselves do not. Wait, what?

Hotshot world likes to call it seed funding to sound quick witted about business.

Raising money for your startup is never fun. Many founders would rather prefer going for Bungee Jumping without any body harness than trying to convince an already hesitant investor to believe in their ideas which they themselves aren’t sure about and try to match the frequency of their unfamiliar bandwidth.

Early Stage Investment VS Seed Funding

Seed funding refers to the earliest round of capital for a startup company. It allows a startup to develop a prototype product and generate sufficient quality in prototype to attract investor’s interest for successive financing rounds.

Early Stage Investment typically comes from Venture Capitalists. This stage brings experience and industry contacts in addition to bigger investments. This stage of investment provides operational flexibility and an opportunity to move from garage to bigger space.

How much money should a startup raise during the phase of seed funding?

A very intuitive response would be to raise as much as a startup can.
Hear me now, believe me later. Raising a big war chest isn’t necessarily better here. Although you should raise as much as your startup needs to build early stage functional prototype, overfunding a startup has its own drawbacks.

This is such a counter-intuitive concept that 80% of the startups fail due to this major reason.

  • With more money being involved, investors would want more control provisions and ensure diligence to make sure their money isn’t being misused.
  • Having a higher valuation prematurely can put a lot of strain on a startup if things don’t go well, and then later raise money again as it increases the likelihood of a subsequent round being a down-round or rather, other new investors passing on the deal in the future because it is ‘too expensive’.

I am a die hard fan of Silicon Valley (TV show). I believe there are numerous lessons that can be learnt from this show.

[3][3]In show, Richard (Thomas Middleditch) is approached by Monica (Amanda Crew) who urges him not to take the monster round of funding that’s been offered to his startup Pied Piper, because it will overvalue the company and possibly lead to a dreaded “down round.” Richard later surprises the new managing director of Raviga Capital, Laurie Bream (Suzanne Cryer), by negotiating her offer of $20 million investment at a $100 million valuation down to $10 million at a $50 million valuation.

The logic behind the move, as the Monica character succinctly explained, is that having too high a valuation and an overly large funding round can be more of a curse than a blessing for a company in its infancy. She points out that many companies have difficulty not only surpassing, but matching the initial price in a follow-on round. Especially if the first round is based off hope and hype and later rounds will have to be based on actual results.[3][3]

Elon Musk faced the same dilemma during early phase of Tesla. He said he ultimately regretted taking the higher priced deal for Tesla from Vantage Point Venture Partners, rather than a lower bid from Kleiner.

The best set of steps to raise seed capital are as follows:

1) Validate your idea without any financing.
2) Try to get to paying customers before approaching seed investors.
3) Bootstrap during that period.
4) Get introduced to seed investors with a clean set of proof points.

Doing a startup is a whole new ball game. It’s nowhere close to seeds blossoming in the savannah. Things are quite counter intuitive in taking decisions for a startup and this is what motivated me to do a thorough blog post on what I have learnt from the show or articles I have read.

Go bears. Be creative. Work on problems that matter.

References:

● I play/teach drums ● Write scalable software systems ● Design product/business ideas